Kenneth Rogoff, a professor at Harvard University and one of the world’s most prominent economists, said central banks across the globe must start preparing themselves to introduce negative interest rates during the next global recession.

… “It makes sense not to wait until the next financial crisis to develop plans and, in any event, it is time for economists to stop pretending that implementing effective negative rates is as difficult today as it seemed in Keynes’ time,” he said, citing the growth of cashless transactions as a reason to think that negative rates could be implemented more easily in future.

“The growth of electronic payment systems and the increasing marginalisation of cash in legal transactions creates a much smoother path to negative rate policy today than even two decades ago.”

Gold came under additional corrective pressure in early U.S. trading, weighed by a further easing of geopolitical tensions, along with some better than expected U.S. economic data. While the yellow metal set new lows for the week, buying interest resurfaced well ahead of last week’s low.

While North Korea may have walked back an imminent threat to Guam, I don’t believe anyone really thinks that the Korean crisis has been resolved. “Though North Korea is signaling its restraint at the moment, fiery rhetoric and further missile tests are far from over,” concludes geopolitical intelligence firm Stratfor. They seem to think North Korea may still fire a missile before or during the joint U.S.-South Korean military exercises that begin August 21.

While risk appetite may have rebounded somewhat, there is still buying interest on dips. The next bout of “fiery rhetoric” will likely push the safest of all the safe-havens back toward $1300.

Today’s better than expected retail sales print for July comes even as the Fed issued a warning about the new record highs in household debt, which exceeded the previous high set in 2008. The New York Fed noted a “persistent upward movement” in credit card delinquencies “not seen since 2009.” While consumers may have bought more stuff in July, there ability to pay-off those credit card balances is looking increasingly dubious.

An economy saddled with that much debt is going to have a hard time growing beyond the current rather tepid 2% pace. In addition, the current expansion is already quite long in the tooth.

Another recession is coming. It may not be today. It may not be tomorrow, but it is coming.

Harvard economist Kenneth Rogoff says global central banks should be preparing plans to implement negative rates in advance of that next recession

“It makes sense not to wait until the next financial crisis to develop plans and, in any event, it is time for economists to stop pretending that implementing effective negative rates is as difficult today as it seemed in Keynes’ time.” — Kenneth Rogoff

The Fed has been desperate to get rates higher in recent years so that they have room to cut in the future; to the point of tightening policy into economic weakness. Here too though, the magnitude of the national, household and corporate debts are seen as major obstacles to that plan. Each basis point of higher rates makes those debts more expensive to service, bringing us closer to the the next debt crisis and recession they so desperately hope to avoid.

If U.S. rates are ultimately taken negative in the U.S., as they have in other major economies, the long-term uptrend in gold is likely to be reestablished. For even Rogoff concedes that such extraordinary monetary policy hasn’t really worked.

“But these policies have now been deployed for some years – in the case of Japan, for more than two decades – and at least so far, they have not convincingly shown an ability to decisively overcome the problems posed by the zero bound.” — Kenneth Rogoff

Don’t think for a second though that the lack of efficacy will prevent central banks from throwing good dollars, yen, euros, pounds and francs after bad. In that eventuality, you are definitely going to want some gold.

India’s gold imports more than doubled to $13.35 billion during the April-July period of the current fiscal, according to Commerce Ministry data.

…In July, imports of the precious metal rose to $2.1 billion, from $1.07 billion in the same month of 2016. The surge in gold imports in July contributed to the widening of the trade deficit to $11.44 billion from $7.76 billion a year earlier. India is recording a surge in inbound shipments of gold from South Korea.

“Anglo-Saxon political angst” is spurring a shift in investment from U.S. and British equities to Europe, according to the latest survey of fund managers by Bank of America Merrill Lynch.
The most important market news of the day.

Money managers of $587 billion polled from Aug. 4 to 10 cut allocations to the two nations to a post-financial crisis low, while boosting positions in European shares. They cite the risk of policy blunders by major central banks as their foremost concerns, followed by a bond crash and escalating tensions with North Korea.

Gold prices are solidly lower in early U.S. trading Tuesday, on follow-through selling pressure from Monday’s declines and on some more normal profit-taking pressure from recent good gains. An uptick in investor risk appetite so far this week is also a negative for the safe-haven metal. December Comex gold was last down $12.90 an ounce at $1,277.50. September Comex silver was last down $0.352 at $16.775 an ounce.

The key U.S. economic data point of the day Tuesday is the retail sales report for July. Sales came in stronger than expected at up 0.6%. Sales were expected to come in at up 0.4% in July versus down 0.2% in June. The stronger retail sales reading dropped the gold market to its daily low. This report also falls into the camp of the U.S. monetary policy hawks, who want to see the Federal Reserve raise interest rates again this year.

World stock markets were mostly higher again Tuesday, on a further apparent de-escalation of the U.S. and North Korea stand-off regarding its nuclear missiles. North Korean news reports Tuesday said President Kim Jong Un has decided not to fire missiles at Guam. The U.S. secretary of defense and secretary of state, as well as other Trump administration officials, in recent days said they are trying to achieve denuclearization of North Korea through diplomacy.

…However, don’t expect the U.S.-North Korea confrontation to just fade away. It’s likely this situation will flare up again, and likely sooner rather than later. And don’t be surprised if this present dip in gold prices becomes a bargain buying opportunity for many traders and investors.

Gold came under additional corrective pressure on diminished geopolitical risks and following better than expected retail sales data from July. However, price action remains confined to last week’s range.

North Korea walked back its threat to launch missiles on the U.S. territory of Guam. Although North Korea is prepared for such an attack, they said they would watch what “the foolish Yankees” do before making a decision.

U.S. retail sales rose 0.6% in in July, above expectations of +0.4%, versus a positive revised +0.3% in June. Retail sales excluding autos rose 0.5%, on expectations of +0.3%. The Empire State Index also bested expectations. U.S. export prices were hotter than expected, while import prices rose slightly, inline with expectations.

– The Fed’s inability to move forward on its desire to raise, or should I say normalize, interest rates

– The over-valuation in the stock market which, in turn, has inspired professional money to diversify with gold being one of the avenues

– The possibility that there is more than enough rancor in Washington to cause a serious problem when extending the debt ceiling comes up for a vote. Repercussions would follow any delay. . . . . .

This is not to say that the situation with respect to North Korea is anything but dangerous and having an effect on gold prices. However, it is superimposed over a market that is also reflecting fundamental economic concerns.

The economy continues to grow weaker despite all of the Fed, Wall St. and media propaganda to the contrary. The economy is growing weaker due to the deteriorating financial condition of the consumer, which is by far the biggest driver of GDP in the United States. The only way the policy-makers can avoid a systemic collapse is “helicopter” money printing, in which printed cash or digital currency credits is, in some manner, distributed to the populace.

The Fed reported that non-revolving consumer debt (not including mortgage debt) hit $2.6 trillion at the end of the first quarter. Student loans outstanding hit a record $1.44 trillion. Recall that at least 40% of this debt is in some form of delinquency, default or “approved” non-pay status. Auto loans hit a record $1.2 trillion. Of this, at the very least 30% is subprime. A meaningful portion of the auto debt is of such poor credit quality when it’s issued that it is not even rated. Credit card debt is now over $1 trillion dollars and at a record level. The average outstanding balance per capita is $9600 per card for those who don’t pay in full at the end of the month. Just counting the households with credit card debt balances, the average balance per household is $16,000. The average household auto loan balance for all households with a car loan is over $29,000.

The data shows a consumer that is buried in debt and will likely begin to default at an accelerating rate this year. In fact, I’d call these statistics an impending economic and financial disaster.

PG View: And they wonder why this has been the weakest recovery since the 1930s . . . IF the Fed resorts to money printing as the solution, gold is going to go through the roof.

President Donald Trump on Monday signed a memorandum that could lead to a trade investigation of alleged Chinese theft of intellectual property.

The measure directs U.S. Trade Representative Robert Lighthizer to look into options to protect U.S. intellectual property. It does not take any specific action against China at this point.

“We will safeguard the copyrights, patents, trademarks, trade secrets and other intellectual property that is so vital to our security and to our prosperity,” Trump said.

He added: “This is just the beginning.”

PG View: This move comes at a critical time. While protecting intellectual propoertty is really important, the U.S. is simultaneously seeking China’s help in deescalating the North Korean situation. This seems unlikely to help that cause. Amid a very real risk of a real war with North Korea, potentially starting a trade war with China seems less than prudent.

So far, the war between US President Donald Trump and North Korean dictator Kim Jong-un over the latter’s nuclear program has been fought only in words. But each turn of the rhetorical screw deepens the risk that, to paraphrase Winston Churchill, “jaw-jaw” could turn into “war-war.”

…It is unlikely that either North Korea or the US actually wants war. But, as the late English historian A.J.P. Taylor concluded, after studying eight great wars since the late eighteenth century, wars have often “sprung more from apprehension than from a lust for war or for conquest.”

In normal times, a looming changing of the guard in the world’s most powerful central bank would be dominating Wall Street’s attention. But these are not normal times.

With headlines consumed by Donald Trump’s chaotic presidency — investigations into possible campaign collusion with Russia, the collapse of healthcare legislation promised for seven years, and now a diplomatic standoff with North Korea — the strong likelihood that Trump will replace Janet Yellen with Gary Cohn, the former president of Goldman Sachs who now leads the president’s National Economic Council, has barely registered.

“Any time you pick someone who’s got a deep academic track record, like a Bernanke, like a Yellen, you have a highly predictable setting for monetary policy,” Neal Soss, the vice chairman for fixed income at Credit Suisse Securities, said in an interview with Bloomberg TV.

…”Gary Cohn doesn’t have that kind of grounding, so from the point of view of Fed watchers there’s at least an initial phase where you have to view that as a less predictable figure and a less predictable policy stance.”

This big increase in gold investment in Germany and the U.K. over the past year and a half is not from the diehard physical bar and coin investors, rather it is from a source that is even more interesting… it’s coming from investors in the retail Gold ETF Market. You see, this is a much different segment of the population who move into the Gold ETF Market versus the 1% that buy physical bar and coins. When there is a surge of Gold ETF buying, it means the institutional or regular mainstream investor is worried about the overall market.

… In just the past five quarters, European Gold ETF flows have surged by 42% from 690 metric tons (mt) in Q1 2016 to 978 mt in Q2 2017 (World Gold Council Demand Trends)

Gold is trading modestly lower, having recovered about half of the losses off of Friday’s high at 1292.05. While the North Korean situation did not escalate over the weekend, it certainly is not going away, so the uptick in risk appetite to start the week is unlikely to be sustainable.

The rebound in the dollar has been tentative at best, suggesting the bias there remains to the downside. The greenback faces some serious headwinds with the Fed’s tightening cycle on hold for the time being — and perhaps even over — along with some fairly significant challenges to the Trump economic agenda.

When Congress gets back from the August recess, the debt ceiling is going to have to be dealt with in fairly short-order. Treasury Secretary Mnuchin has warned that the debt ceiling will have to be raised (or suspended) by September 29 to avoid a default on some payments.

That will leave the House and Senate just a dozen joint working days to hammer out a deal. However, Mnuchin’s hope for a clean debt ceiling bill seems like a long-shot. That will certainly contribute to risk aversion in the weeks ahead.

July retail sales comes out tomorrow with a 0.4% rebound anticipated. If this proves overly optimistic, there would be negative implications for Q3 GDP revisions.

Gold remains just off the highs for the year, as it moves into its seasonally strong period. With geopolitical, political, growth and price risks all highlighted, the last four months of the year could prove exciting for the yellow metal indeed.

Inside President Donald Trump’s White House, no one seems to be looking forward to September.

Senior officials have described the coming month as “brutal,” “bad” or “really tough” because of the confluence of complicated issues — but they also say it’s pivotal to getting the presidency back on course.

…“The stakes are very high in September,” said Jenny Beth Martin, who leads the Tea Party Patriots, a conservative grass-roots group. “There is a lot to do in a very short period of time.”

PG View: September also marks the beginning of a cyclically strong period for gold. Now may be the time to buy.

The momentum of the first half fizzled away last month after the country’s leadership listed financial risks as major threats to the health of China’s US$11 trillion economy.

A slowdown in property investment and home sales, along with an easing in overseas shipments, point to further weakness down the road as President Xi Jinping seeks to cement his power at a key Communist Party congress this year and push ahead with a long-delayed economic restructure.

Yao Wei, chief China economist at Societe Generale, said Beijing’s efforts to curb risks would be clearer after the congress and this was a fundamental reason to be cautious about growth in China.

“Deleveraging and lowering risk in the financial system are now clearly among the top medium-term objectives of the Xi administration,” Yao said.

Gold dropped by half a percentage point on Monday, retreating from last week’s two-month highs under pressure from a strengthening dollar and a slight easing of tensions between the United States and North Korea.

Though North Korea’s Liberation Day celebration on Tuesday could raise the temperature again, markets were relieved that the weekend passed without more inflammatory rhetoric.

…”A lot of the negative news is priced into the dollar. That, combined with no real escalation in North Korea, should lead to lower gold prices, though it doesn’t mean we expect a very negative trend. We’ll stay within the $1,200 to $1,300 range for the year,” said ABN Amro strategist Georgette Boele.

Gold eased in overseas trading to begin the week as U.S. and South Korean officials played-down the possibly of war. The retreat from in front of 1296.06/1300.00 leaves the upside protected for the time being, but thos morning’s dip already seems to be attracting buying interest.

“I am certain the United States will respond to the current situation calmly and responsibly in a stance that is equal to ours,” said South Korean President Moon Jae-in. U.S. National Security Adviser H.R. McMaster said, “I think we’re not closer to war than a week ago, but we are closer to war than we were a decade ago.”

This talk is much more tempered than some of the fiery rhetoric from both sides heard last week. However, things could escalate again if North Korea conducts another missile test, as some are anticipating.

The U.S. calendar is quiet today. July retail sales along with import and export prices are out tomorrow. Later in the week we’ll see industrial production and LEI.

Gold prices settled Friday at their highest level since early June, up 2.3% for the week, as tensions tied to North Korea boosted haven demand for precious metals. December gold added $3.90, or 0.3%, to settle at $1,294 an ounce. That was the highest finish for a most-active contract since June 6, according to FactSet data.

Gold popped to a new 9-week high of 1292.05 in early New York trading, following more disappointing inflation data. While the yellow metal has been unable to breakthrough to new highs for the year above 1296.06, both the technical and fundamental biases remain to the upside.

U.S. CPI rose just 0.1% in July, below expectations of +0.2%, versus unchanged in June. The annualized pace of consumer inflation ticked up to 1.7%. Core CPI also rose 0.1% on expectations of +0.2%, versus a 0.1% rise in June. That left core consumer inflation unchanged at +1.7% y/y.

As expected, Fed rate hike expectations eroded further. September remains off the table, but the probability of a December hike tumbled to 35.9%. In an interesting twist, the CME’s FedWatch Tool is now showing a chance — albeit slight — for a 25 bps rate CUT!

Obviously the heightened geopolitical tensions have been the big driver in gold this week. Deescalating the situation is likely to prove difficult, with both sides seemingly digging in their heels. While the AP reports that back-channel communications between the U.S. and North Korea have been ongoing for several months, the risk of an unintended military confrontation remains very real.

We talked earlier this week about U.S. credit card debt exceeding $1 trillion again and surpassing the previous record high from 2008. It’s also worth noting that similarly, total household debt outstanding — inclusive of mortgages, credit cards, student and auto loans — has also reached a record high $12.7 trillion. Here too, the previous high occurred in 2008 just as the global financial crisis was unfolding.

This level of debt is of particular concern in light of wage stagnation. The average American is increasingly indebted, while not earning additional income to service that debt load. A rise in interest rates would be devastating, so the Fed must tread very cautiously here. However, even if rates stay steady, at some point this situation is going to take its toll on on our consumption driven economy. We are past due for the next recession.

Since the Great Depression, the U.S. has suffered thirteen recessions. The periods of economic growth between recessions have been as long as 120-months, and as short as 12-months. The average is right around 60-months. The time elapsed since the Great Recession ended in June 2009 presently stands at 97-months.

If growth collapses under the strain of this massive debt burden, the implications for the asset bubbles in equities and and housing could be dire indeed. While geopolitical risks may have started the flows toward more balanced portfolios this week, the economic realities that are coming into focus may sustain said flows, to the benefit of gold.

Precious metals headed for strong weekly gains Friday, extending prices that were already at their highest level in more than two months as simmering North Korean tensions slammed stocks and other assets perceived as risky.

Gold gained as U.S. stocks were headed toward their worst weekly performance since November.

“Risk-off mode is in full swing with investors piling their bets in Japanese yen, the Swiss Franc and the yellow metal. Profit-taking is the major theme when it comes to the equity market,” said Naeem Aslam, analyst at Think Markets.

…Geopolitical tension persisted after a North Korean army commander this week said “sound dialogue is not possible” with U.S. President Donald Trump and “only absolute force can work on him,” according to state media. North Korea also laid out detailed plans of how it would launch a missile strike on U.S. military bases in Guam. Late Thursday, Trump said his threat to unleash “fire and fury” on North Korea “maybe wasn’t tough enough.”

The US dollar has been in a large sideways pattern for over two years. In spite of the recent rebound, however, this analysis shows it is indeed vulnerable to a big fall. The momentum indicator is especially negative.

A breakdown isn’t guaranteed, of course, but the setup clearly shows the risk.

Monthly gold prices paint a somewhat different picture. As you can see in the next chart, both price and momentum have coiled, which suggests a big move is ahead.

Which way will gold break? We don’t know for sure, but notice Dominick’s comment on money flow (a measure of volume over the past 21 days): it turned positive for the 1st time in three years. This is a bullish indicator.

A weekly analysis of gold shows a similar setup.

Again, which direction gold will break is not clear, but in this chart you can see the momentum indicator is above zero, a bullish sign.

The Fed tells visitors its basement vault holds the world’s biggest official gold stash and values it at $240 billion to $260 billion. But ‘no one at all can be sure the gold is really there except Fed employees with access,’ said Ronan Manly, a precious-metals analyst at gold dealer BullionStar in Singapore. If it is all there, he said, the central bank has ‘never in its history provided any proof.'”

MK note: I was very surprised to see this article on the front page of this morning’s Wall Street Journal. It raises some interesting questions begging answers. . . . . . . .